What is the difference between debt and deficit?

The deficit is the gap between government spending and income in a single year. The debt is the total built up over many years, which each year's deficit adds to. The deficit is a flow; the debt is a stock.

A gilt is a UK government bond. Investors lend money by buying gilts; the government pays interest and repays the value at a set date. Some gilts are index-linked, so their cost rises with inflation.

Why does the debt-to-GDP ratio matter?

Debt measured against the size of the economy shows the burden relative to the means to service it. A growing economy can carry more debt comfortably, so economists watch the trend in the ratio rather than the cash total alone.

Is government debt like household debt?

Only loosely. Like a household, spending more than income must be borrowed and adds to a total. But a government that issues its own currency has options a household never has, need not clear its debt within a lifetime, and its spending and taxes change the size of the economy itself.

Debt vs deficit, in plain English

Two words that sound alike but mean different things. Get these straight and most public-finance news makes more sense.

The one-sentence version

The deficit is the gap in a single year. The debt is the pile that gap adds to. Borrow £100 billion this year and you add £100 billion to a debt that already runs into trillions.

The key terms

Debt: The total the government owes, built up over many years. A stock — a running total. The UK's headline measure is public sector net debt.
Deficit: The amount spending exceeds income in one year. A flow. A surplus is the opposite — income above spending.
Borrowing: The cash raised to cover a deficit, mostly by selling gilts. In the monthly statistics this is "public sector net borrowing".
GDP: The size of the economy in a year. Used as the yardstick: £100 billion means more to a small economy than a large one.
Gilts: UK government bonds. Investors lend money by buying them; the government pays interest and repays the value at a set date.
Debt interest: The cost of servicing the debt. Driven by how much is owed and the interest rate paid. Some UK debt is index-linked, so its cost rises with inflation.

Who lends to the government?

Buyers of gilts include UK pension funds and insurers, banks, overseas investors, and the Bank of England. The UK Debt Management Office runs the sales. Lenders are repaid with interest, which is why the interest rate on new debt matters so much.

Why debt-to-GDP matters

The cash total grabs headlines, but economists watch debt as a share of GDP. A growing economy can carry more debt comfortably; the ratio shows the burden relative to the means to service it. The trend matters more than any single month.

Why interest rates matter

When rates rise, new and maturing debt costs more to service, and index-linked gilts cost more when inflation is high. The same pile of debt can be cheap or expensive depending on rates. That is why "how much" and "at what rate" are both part of the story.

The household analogy: where it helps, where it breaks

Where it helps

Spend more than you earn and the shortfall must be borrowed.
Borrowing adds to a total you carry forward.
Higher interest rates make that total more expensive to hold.

Where it breaks

A government that issues its own currency has options a household never has — though in practice money creation is controlled by the Bank of England, not by ministers.
Governments do not retire and need not clear debt in a lifetime — debt can be rolled over indefinitely.
Government spending and taxes change the size of the economy itself; a household's budget does not move national income.
Government borrowing costs are set in deep, global markets, not by a personal credit score.